Sweden fears slide into the slow lane

Sweden's Social Democratic government, custodian of one of the most expensive welfare systems, yesterday faced the challenge of reforming the economy to meet European Union target dates for a single currency.

Persistent financial troubles make it inconceivable that Sweden could be ready for monetary union by 1997, the earliest date set by the Maastricht Treaty, and one reiterated in Brussels yesterday by Jacques Santer, the European Commission President. But the Prime Minister, Ingvar Carlsson, hopes ambitious budget reforms announced last month will enable Sweden to meet the strict Maastricht criteria by 1999, the alternative single currency launch date.

Sweden's prosperity, evident in Stockholm's fashionable shops and high prices, disguised a relative economic decline for almost 25 years. Financing an ever-expanding public sector out of moderate economic growth has gradually caught up with Sweden in the shape of government debts and budget deficits much too high to justify entry into EU monetary union.

European Commission analyses, and private government studies in several EU countries, lump Sweden with countries such as Greece and Portugal as unlikely to make the single currency grade this century. It seems extraordinary for a country rated the world's fourth richest state as recently as 1970.

Yet only last September, Swedish voters threw out the conservative Moderate Party of Carl Bildt, which had tried to revive the economy through tax-cutting and labour reform, and elected the Social Democrats, the tax- and-spend party par excellence. They have governed alone or in coalitions for all but nine years since 1932. Their victory indicated many voters have yet to grasp the scale of the task faced.

Sweden's armies of public sector workers are especially hostile to fundamental welfare state reform of the kind that many Swedish industrialists and bankers say is essential if the country is not to slip into Europe's slow lane. A sharp rise in unemployment since 1990 has exacerbated the public debt problem by reducing tax revenues and triggering lavish spending on people without jobs.

The Finance Minister, Goran Persson, announced a mixture of tax rises and spending cuts in his budget last month to reduce the budget deficit from 11.2 per cent of gross domestic product now to 3 - 5 per cent by 1998. Public debt is supposed to fall to below 100 per cent of GDP.

If those targets are met, Sweden could be part of the single currency. But that would probably require a liberal reading of the Maastricht criteria, which may not go down well with the financial disciplinarians of Germany's Bundesbank.

Like Britain and Italy, Sweden received a painful lesson in 1992 when it tried to peg its currency to the Ecu - in effect, a policy of tracking the German mark - only to be forced into cripplingly high interest rates before humiliating devaluation. Similar problems have dogged the krona since 1992, with the result that some economists question whether the currency is strong enough to remain part of a mark-dominated currency union over the long term.

"When the business cycle is up, everything looks OK. But what do you do when the cycle turns down? You have to break the cycle. It's difficult," a senior EU government minister said.

Having emerged from a November referendum that produced a narrow majority in favour of EU membership, Swedes have had little time to consider whether they want to be in a monetary union.

Ultimately, the issue must be debated and, as in November, it will raise issues of self- determination and democratic controls that are important to Swedes. So far, however, few politicians have suggested joining a single currency should be put to another referendum.